Freemium, the hybrid of “free” and “premium,” has become a successful business model with the rise of mobile technology like smartphone apps. The varied freemium products and services include LinkedIn’s free profiles and accounts but paid subscriptions for richer functionality and online games like Candy Crush that are free to play but offer paid features to advance in gameplay. Deciding if a freemium model is right for your business can be challenging but there are some key factors to consider.
The freemium business model has a couple of options. Some freemium products are developed to convert free users to paying users, and some are ad-supported, focusing on ad revenues rather than trying to get free users to pay for upgraded experiences. As Jules Maltz and Daniel Barney explain for Tech Cruch, the typical free-to-paying user conversion rate is pretty low at one to 10 percent. Startup costs and sales and marketing expenses for a freemium offering have to be low and the product has to be very compelling to a wide audience to be successful.
Pros & Cons
There are good reasons to go freemium and good reasons not to, depending on who you talk to. Scott Gerber, author, entrepreneur, and founder of Young Entrepreneur Council (YEC), talked to 10 entrepreneurs from YEC about the pros and cons of freemium models.
Top reasons for offering free products and services:
• Quick exposure to large numbers of potential customers.
• An effective way to demonstrate your product.
• Ease of up-selling with a compelling free offering.
Top reasons not to go freemium:
• The creation of overhead without paying customers.
• Easy to get the benefits of freemium (free forever) and free trial confused.
• Free users can be low-value leads.
Why Freemium Businesses Fail
Forbes contributor Brett Nelson interviewed freemium business expert Brian DeChesare about how he built a profitable business with thousands of customers in less than four years with the freemium model. DeChasare says freemium businesses fail because they are in the wrong market, they don’t create a compelling reason to upgrade to the paid version, they aren’t tracking the right metrics or any metrics at all, and they don’t guide prospective customers towards paying products and services in which they’ve shown an interest. He explains that freemium businesses must be in markets with customers who are already paying money for solutions and they must pay attention to metrics including total cost to create freemium products and services ad return on investment for offering them.
Once a company decides to use a freemium business model , there must be a clear distinction between what’s free and what’s for sale, and free offerings must relevant to paid offerings. Using a recurring billing tool like Charify helps small businesses convert free users to premium users with subscriptions and automated invoicing.
There can be one free item or one type of free item that is similar to premium paid items, such as college textbook company Flat World’s free online textbooks and paid physical books and premium learning products. Or there can be a premium version of the free offering, like education video company Common Craft’s High-Definition version of its free videos.
Advertise the free product or service alongside the premium paid product, or advertise the premium offerings as an enhanced experience of the free offering, such as law firm Wilson, Sonsini, Goodrich, and Rosati’s free term sheet generator and enhanced law services.
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